Column: US should get ready for higher oil prices

Without the Keystone XL pipeline, the US will soon have to compete on the international market for higher priced oil

By Ryan Lijdsman

EDMONTON, AB/ Troy Media/ – Now that the U.S. State Department has laid to rest any scientific claim to blocking the Keystone XL pipeline, the latest argument used by anti-pipeline proponents is that the U.S. does not need Canadian oil at all.

U.S. shale oil technology, they claim, has prevailed over peak oil and the U.S. has enough oil for the next 50 years. But this argument is fundamentally flawed. The U.S. shale boom will soon peak and without an energy strategy that includes international supply the U.S. will not have enough oil to keep its economic heart beating.

The theory of peak oil was developed in the 1950s by petroleum geologist M. King Hubbert. He demonstrated how, during initial development, oilfields go through a period of high production growth, then growth slows and output reaches a maximum, or “peak,” level and then begins to subside. Eventually, the law of diminishing returns takes hold and the cost of production exceeds profit, and continued extraction becomes uneconomical. Peak oil was the mantra during high oil prices of the early 2000’s and lasted until the shale oil boom led to massive increases in provable reserves. But, at best, the technology that gave the shale oil/gas booms has only delayed peak oil, not discredited it.

The Energy Information agency (EIA) stated in its latest yearly update that U.S. shale oil production will peak in 2021 when it will reach 4.8 million bpd. This year alone they estimate production will increase 1.2 million bpd to 3.5 million bpd. These numbers appear optimistic for the future of shale oil but the EIA’s assumptions may be more rhetoric than reality. Most of America’s shale oil – about 74 per cent – is produced in the Eagle Ford and Bakken fields. These fields are depleting extremely fast and many industry sources put the peak as soon as 2016 not 2021.

Wells drilled in the Eagle Ford area are declining 60 per cent in their first year. In Bakken, the rate of decline is 69 per cent in the first year and the life of these wells is a mere three to four years. In contrast, conventional wells decline on average 50 per cent over the first two years, plateau, and then decline at approximately 5 per cent per year and last 20 years or more. In order to recover the 11 billion barrels that the EIA estimates is recoverable in these areas, 48,000 new wells would need to be drilled by 2035. That is five times the current number of wells.

Over-estimating reserves is also nothing new for the EIA. It recently downgraded the recoverable reserves in the Monterey field to 13.7 billion barrels from 15.4 billion barrels estimated only last year. It estimated that shale gas reserves in Poland were 187 trillion cubic feet (TCF), but exploration and study by the Polish Geological Institute led to a downgrading of reserves to 27 TCF.

Canadian oil is not the perfect solution for the U.S. once the current boom is over, but it should be part of it. Canada’s environmental regulations may be questionable, and production will never put it in the same category as Saudi Arabia or other large producers, but the United States has also failed to properly regulate its shale oil/gas development or cut demand.

The environmental problems can be overcome with political will on both sides of the border working together on a future energy strategy. What are not solvable are the supply disruptions and higher prices the U.S. will face if it chooses not to implement a long-term energy plan that includes the Keystone XL pipeline in its all-of-the-above strategy.

A political decision against Keystone will not be catastrophic for the U.S. economy, but it will mean that the U.S. has one less supply option and will have to compete with China, India, and other consuming nations, on the international market for higher priced oil. For Canada, it will mean that the U.S. market becomes less and less important at a time of greatest U.S. demand.